Will the SEC Be Able to Nail Goldman?

Yesterday, the SEC announced
it was suing hated megabank Goldman Sachs--which up until now has
managed to stay on the right side of the law--for fraud. To review, the
basic charge is that Goldman sold securities "designed by an interested
manager," in the words of The Atlantic's Dan Indiviglio,
"to go bad, but didn't represent them that way to investors." More
specifically, the security looked like it had been evaluated and put
together by ACA--a third-party firm--when in fact it had been
structured more by hedge funder John Paulson, who was himself betting
(contrary to what Goldman suggested) against the ultimate success of the security.

So
what do the experts think of the charge? Does the SEC have a good
chance of finally nailing down Goldman, the ultimate trophy from the
populists' perspective? Here, the opinions of top business bloggers,
former Wall Streeters, and a lawyer:

SEC Looking Good
While admitting that "there is some chance that the SEC has a weak
case, but looks to enjoy some public praise for finally appearing to
crack down [on Goldman and their ilk]," The Atlantic's Dan Indiviglio says the bottom line is this:

The
idea is that Goldman structured securities that were designed by an
interested manager to go bad, but didn't represent them that way to
investors. If the facts of the case are proven to be accurate as
depicted above, then it should be very easy for the SEC to prove fraud.
Cherry picking bad assets and selling them to investors who thought
they were chosen by an "independent manager" is illegal.

SEC Looking SelectiveEdward Harrison,
economics consultant, finds it odd that the SEC is going after Goldman
rather than John Paulson, and suspects that this may well be an SEC
publicity stunt.

True, and That's Not Good, points out Reuters's James Pethokoukis,
who looks at the political incentives for the SEC case. "Its aggression
can also lead to unforced errors. A judge threw out a $33 million SEC
fine against BofA regarding bonuses paid to Merrill Lynch employees.
The SEC also failed to execute in its case against Cohmad Securities
and the firm’s involvement with Bernard Madoff. In February, a federal
court dismissed the SEC’s “flimsy” charges that Cohmad helped enable
the notorious Ponzi schemer."

'Should Be a Slam-Dunk,' But Might Not Be Former Goldman employee Yves Smith,
who has long criticized her former company for this very deal, notes
that the SEC's is a civil, not a criminal, case against
Goldman. That indicates, as others, too, have pointed out, that the
evidence wasn't strong enough for a criminal case. "Moreover, the
S.E.C. has long had a difficult time winning complex financial fraud
cases ... Years of deregulation have narrowed the ground for lawsuits
considerably," and "structured credit is a new area of litigation. Thus
the S.E.C. is also mounting its case in an arena where there are few
precedents to rely upon."

Case 'Very Weak,' declares a Henry Blodget,
himself once a target of the SEC (he settled). He argues "Goldman
likely has a strong argument that it was not required to disclose that
Paulson & Co. had been involved in the selection process. Why?
Because it is clear from the email snippets the SEC cites that ACA had
full control over which securities were selected for the final
portfolio." Elsewhere,
Blodget also adds that, weakening the case, the victims here "were not
sympathetic mom-and-pop investors--they were highly sophisticated
German banks who knew (or should have known) exactly what they were
doing." On the other hand, Goldman "will NEVER be a sympathetic
defendant." The SEC has that going for it.

Looks Stronger than Some The Atlantic's head business blogger, Megan McArdle,
acknowledges that "financial crises produce immense political pressure
for securities regulators and attorneys general to go head-hunting, and
the cases often turn out to be weaker than they seem once the defense
gets a chance to speak ... But it certainly sounds as if the SEC has
the goods here."

Much Ado About Nothing: Here's What's Going to Happen Wall Streeter Joshua Brown
rejects all the hype. Goldman will hire great lawyers, he says, will
settle, will "admit no wrongdoing" while "the White House will claim
victory ... Not one of you will be safer, more employed or in better
shape as a result of any of this," and "the lawyers and PR reps
involved in the case will buy Maseratis and vacation homes. Lots of
them."

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